Comments on Paul Krugman: That Terrible TrillionTypePad2012-12-17T04:41:22ZMark Thomahttp://economistsview.typepad.com/economistsview/tag:typepad.com,2003:http://economistsview.typepad.com/economistsview/2012/12/paul-krugman-that-terrible-trillion/comments/atom.xml/Mark A. Sadowski commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017c34ba814a970b2012-12-18T07:17:50Z2012-12-18T07:17:50ZMark A. SadowskiWhat Krugman said was: "Reasonable estimates say that we have an output gap of something like $900 billion a year...<p>What Krugman said was:</p>
<p>&quot;Reasonable estimates say that we have an output gap of something like $900 billion a year — yes, some would dispute that, but it’s the estimate I find most convincing.&quot;</p>
<p><a href="http://krugman.blogs.nytimes.com/2012/12/14/how-big-is-the-budget-hole/" rel="nofollow">http://krugman.blogs.nytimes.com/2012/12/14/how-big-is-the-budget-hole/</a></p>
<p>It&#39;s pretty obvious he&#39;s talking about the CBO&#39;s estimate since that&#39;s the only estimate of the output gap produced by a government entity. And considering the amount of effort that the CBO puts into computing the output gap:</p>
<p><a href="http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/30xx/doc3020/potentialoutput.pdf" rel="nofollow">http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/30xx/doc3020/potentialoutput.pdf</a></p>
<p>and the fact that it is easily available through FRED:</p>
<p><a href="http://research.stlouisfed.org/fred2/graph/?graph_id=82210&category_id=0" rel="nofollow">http://research.stlouisfed.org/fred2/graph/?graph_id=82210&amp;category_id=0</a></p>
<p>it would be silly of him to cite anything else.</p>Mark A. Sadowski commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017d3ee9522a970c2012-12-18T07:01:11Z2012-12-18T07:01:11ZMark A. SadowskiMissing link: http://krugman.blogs.nytimes.com/2012/07/11/filters-and-full-employment-not-wonkish-really/<p>Missing link:</p>
<p><a href="http://krugman.blogs.nytimes.com/2012/07/11/filters-and-full-employment-not-wonkish-really/" rel="nofollow">http://krugman.blogs.nytimes.com/2012/07/11/filters-and-full-employment-not-wonkish-really/</a></p>Mark A. Sadowski commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017ee65d6d5b970d2012-12-18T05:57:00Z2012-12-18T05:57:00ZMark A. Sadowski"Well of course the HP-Filter will define away all cyclical demand deficiencies as losses of potential if one uses a...<p>&quot;Well of course the HP-Filter will define away all cyclical demand deficiencies as losses of potential if one uses a sufficiently small smoothing factor. The question is what is a reasonable smoothing factor.&quot;</p>
<p>Have you ever applied an HP-Filter to the US Great Depression? If you use a large smoothing factor it simply interprets the entire 1920s as being above capacity and it interprets 1929 as a ridiculously huge boom. There is no reasonable lambda value for the US Great Depression.</p>
<p>All an HP Filter is useful for is measuring a trend. Wherever you go, there you are. It tells you absolutely nothing about potential GDP.<br />
<br />
&quot;Yes, a protracted slump gets interpreted as a decline in potential output if it is sufficiently protracted. Are you going to claim that Japan has been in a cyclical recession for the last two decades? For the the claim of a &quot;cycle&quot; to make any sense there would have to be a serious expectation that Japan is going to flip to the other side of the cycle and grow significantly faster. That there has been a loss of potential is the more reasonable interpretation. &quot;</p>
<p>If that were true then by definition no economy could ever have a prolonged disequilibrium. And yet there was the US Great Depression, and we saw despite a decade long slump in growth there was still vast amounts of untapped potential that finally were exploited in WW II.<br />
<br />
&quot;The OECD didn&#39;t use just a HP filter and they had marked down Japan&#39;s potential growth down to 1.6% at the time Krugman was claiming that the OECD was overestimating Japan&#39;s output gap.&quot;</p>
<p>The OECD uses a hybrid method based on a Cobb-Douglas production function that relies on univariate filters (usually an HP-Filter) to calculate trend rates of the input factors. Thus it generates results that correlate closely with those produced by an HP-Filter. Indeed, the OECD estimates of the output gap are virtually identical to the IMF estimates.</p>
<p>&quot;Yet few would dispute that the OECD looks more correct than Krugman 15 years later.&quot;</p>
<p>If by few, you at least include the Bank of Japan, then I might agree. </p>Brian_Dell commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017c34b9de20970b2012-12-18T05:30:37Z2012-12-18T05:30:43ZBrian_Dellhttp://profile.typepad.com/briandellOn Friday Krugman said that he pegged the output gap at $900 billion, which divided by $15.8 trillion Q3 GDP...<p>On Friday Krugman said that he pegged the output gap at $900 billion, which divided by $15.8 trillion Q3 GDP is 5.7%. Yet none of the metrics in that Table 1 are near that level except for the CBO which has marked down its estimate for potential GDP a decade out by 8.5% since 2007 (the CBO has slowly but surely been realizing that potential GDP has fallen sharply... the lack of variability in the CBO&#39;s estimate is a strike against it). And those metrics would be even further from Krugman&#39;s estimate if you used Q3 instead of Q2. In any case, my comment concerned the rate of change of job vacancies as opposed to the level. On that point the increase since 2009 is remarkable and inconsistent with the thesis that the output gap remains as steady as the CBO and Krugman contend.</p>Brian_Dell commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017ee65d0e6f970d2012-12-18T04:58:12Z2012-12-18T04:58:17ZBrian_Dellhttp://profile.typepad.com/briandellWell of course the HP-Filter will define away all cyclical demand deficiencies as losses of potential if one uses a...<p>Well of course the HP-Filter will define away all cyclical demand deficiencies as losses of potential if one uses a sufficiently small smoothing factor. The question is what is a reasonable smoothing factor. Yes, a protracted slump gets interpreted as a decline in potential output if it is sufficiently protracted. Are you going to claim that Japan has been in a cyclical recession for the last two decades? For the the claim of a &quot;cycle&quot; to make any sense there would have to be a serious expectation that Japan is going to flip to the other side of the cycle and grow significantly faster. That there has been a loss of potential is the more reasonable interpretation. The OECD didn&#39;t use just a HP filter and they had marked down Japan&#39;s potential growth down to 1.6% at the time Krugman was claiming that the OECD was overestimating Japan&#39;s output gap. Yet few would dispute that the OECD looks more correct than Krugman 15 years later. </p>Lee A. Arnold commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017c34b86def970b2012-12-18T01:46:30Z2012-12-18T01:46:30ZLee A. Arnoldhttp://www.youtube.com/user/leearnoldKrugman is right, there really is no deficit problem, but we are making a huge mistake for the future if...<p>Krugman is right, there really is no deficit problem, but we are making a huge mistake for the future if we don&#39;t get this economy cooking right now:<br />
<a href="http://www.youtube.com/watch?v=Wd4HDautaUw" rel="nofollow">http://www.youtube.com/watch?v=Wd4HDautaUw</a></p>im1dc commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017c34b81a79970b2012-12-18T00:52:08Z2012-12-18T00:52:08Zim1dc"And you should recognize all the hyped-up talk about the deficit for what it is: yet another disingenuous attempt to...<p>&quot;And you should recognize all the hyped-up talk about the deficit for what it is: yet another disingenuous attempt to scare and bully the body politic into abandoning programs that shield both poor and middle-class Americans from harm.&quot;</p>
<p>Yes, yes, yes!</p>
<p>Much more on this topic please! </p>Lee A. Arnold commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017c34b7ab49970b2012-12-17T23:44:07Z2012-12-17T23:44:07ZLee A. Arnoldhttp://www.youtube.com/user/leearnoldBoth the vacancy rate and the long-term unemployed rate can increase, because the long-term unemployed lose the weak ties to...<p>Both the vacancy rate and the long-term unemployed rate can increase, because the long-term unemployed lose the weak ties to employment:</p>
<p><a href="http://delong.typepad.com/sdj/2012/12/the-deterioration-in-the-unemployment-vacancy-relationship-is-a-long-term-unemployment-fact.html" rel="nofollow">http://delong.typepad.com/sdj/2012/12/the-deterioration-in-the-unemployment-vacancy-relationship-is-a-long-term-unemployment-fact.html</a> </p>
<p>Aggregate demand does not include the &quot;demand for labor&quot;.</p>Mark A. Sadowski commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017d3ee5e8eb970c2012-12-17T21:56:44Z2012-12-17T21:56:44ZMark A. Sadowski"In 1998 Paul said "my guess is that in retrospect it will seem clear that Japan's 1998 output gap was...<p>&quot;In 1998 Paul said &quot;my guess is that in retrospect it will seem clear that Japan&#39;s 1998 output gap was 8 percent or more.&quot; I dare say that in retrospect Japan was operating far closer to potential than that.&quot;</p>
<p>In this particular case time has proved Krugman right. Here&#39;s a paper on the BOJ&#39;s methods for estimating the output gap:</p>
<p><a href="http://www.cirje.e.u-tokyo.ac.jp/research/workshops/macro/macropaper04/kamada.pdf" rel="nofollow">http://www.cirje.e.u-tokyo.ac.jp/research/workshops/macro/macropaper04/kamada.pdf</a></p>
<p>Note in particular Figure 2. The Standard Output Gap measure shows that the output gap in Japan was in the 8-10% of GDP range in 1998.</p>
<p>&quot;He&#39;s likely overestimating the gap again, given where inflation is currently at.&quot;</p>
<p>Only if &quot;inflation persistence&quot;, as measured by regressing inflation on the lag of inflation is high. In fact inflation persistence is low. Which means that it is both possible for the output gap to be large and the risk of deflation low. see for example this:</p>
<p><a href="http://www.frbsf.org/publications/economics/letter/2009/el2009-12.pdf" rel="nofollow">http://www.frbsf.org/publications/economics/letter/2009/el2009-12.pdf</a></p>
<p>&quot;I might also note that job vacancies rose throughout 2010, 2011, and the first half of 2012 which isn&#39;t consistent with an enormous output gap.&quot;</p>
<p>Job vacancy based estimates of the output gap put it at 2.1% as of 2012Q2. See Table 1:</p>
<p><a href="http://www.frbsf.org/publications/economics/letter/2009/el2009-19-update.pdf" rel="nofollow">http://www.frbsf.org/publications/economics/letter/2009/el2009-19-update.pdf</a></p>
<p>This is just one of seven measures considered in this particular paper and is considerably smaller than the the three largest estimates. </p>
<p>One possibility for the discrepancy is hysteresis due to a persistent large output gap. (It has been five years after all.) And note that the jobs vacancy based estimate of the output gap was the largest estimate in 2009Q4 so it would seem that it is more variable than the other measures.</p>Johannes Yohighness commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017c34b6df3a970b2012-12-17T21:38:29Z2012-12-17T21:38:29ZJohannes Yohighness" a ONE TRILLION DOLLAR deficit. No, I don’t think the people making this pronouncement realize that they sound just...<p><br />
&quot;<br />
a ONE TRILLION DOLLAR deficit. </p>
<p> No, I don’t think the people making this pronouncement realize that they sound just like Dr. Evil<br />
&quot;</p>
<p>A trillion here and a trillion there and soon you are talking about real Kruggmann. Do this!</p>
<p>Make an assumption! Assume that deficits don&#39;t matter. Close down the IRS! Increase spending on all Krugman Goods, Krugman Programs, and Krugman Transfer Payments! Run up the deficit! Run up the public debt! Destroy the World&#39;s faith in our print jobby of Triffin Fiat. Try to spend our unwanted monopoly money in foreign countries where people say, &quot;Yankee go home, and take your green backs with you!&quot;. Buy a wheel barrow to function as your new wallet then let the good times roll</p>
<p>on one wheel<br />
!<br />
</p>Mark A. Sadowski commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017c34b6db2c970b2012-12-17T21:35:45Z2012-12-17T21:35:45ZMark A. SadowskiThere are far better estimates of Japan's output gap available. See for example this: Real-Time Estimation of the Output Gap...<p>There are far better estimates of Japan&#39;s output gap available. See for example this:</p>
<p>Real-Time Estimation of the Output Gap in Japan and its Usefulness for Inflation Forecasting and Policymaking<br />
Koichiro Kamada<br />
Bank of Japan<br />
April 2004</p>
<p>Abstract:<br />
&quot;This paper examines Bank of Japan methods for the estimation of the output gap, especially in the perspective of real time estimation problem. After briefly reviewing the evolution of output gap estimation at the Bank, I discuss advantages and disadvantages of various output gap measures developed so far. First, I examine the usefulness of the output gap for inflation forecasting and show that real-time output gap sometimes includes too much noise to improve inflation forecasting. Second, I investigate the implication of real-time estimation problem on the Taylor Rule and evaluate the bank&#39;s policy during the asset bubble period of th late 1980s through the early 1990s. Third I exploit the TANKAN information to enhance the usefulness of real-time output gap in inflation forecasting and policymaking.&quot;</p>
<p><a href="http://www.cirje.e.u-tokyo.ac.jp/research/workshops/macro/macropaper04/kamada.pdf" rel="nofollow">http://www.cirje.e.u-tokyo.ac.jp/research/workshops/macro/macropaper04/kamada.pdf</a></p>
<p>Note in particular Figure 2. The Standard Output Gap measure shows that the output gap in Japan was in the 8-10% of GDP range in 1998 whereas the HP-Filter measure shows an output gap of only 0-2%. </p>Matt Young commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017ee65a306f970d2012-12-17T21:22:43Z2012-12-17T21:22:43ZMatt YoungInsight to behold. If interest rates double, then simply working the average means we need another $120 billion os so...<p>Insight to behold. If interest rates double, then simply working the average means we need another $120 billion os so in debt service.</p>Matt Young commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017ee65a2cb7970d2012-12-17T21:20:25Z2012-12-17T21:20:25ZMatt YoungIn a growing economy bondholders won't lend in the short term, they go into the stock market. Hence, government is...<p>In a growing economy bondholders won&#39;t lend in the short term, they go into the stock market. Hence, government is stuck with a balanced budget in the short term, they have no choice. For example, Clinton/Gingrich, he simply adjusted central government to get multipliers above one and the budget autiomatically balanced as both government and bondholders left the debt market.<br />
</p>Mark A. Sadowski commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017c34b6b2fd970b2012-12-17T21:11:35Z2012-12-17T21:11:35ZMark A. SadowskiThe IMF doesn't use a model to estimate the output gap. It uses a Hodrick-Prescott (HP) Filter: http://en.wikipedia.org/wiki/Hodrick%E2%80%93Prescott_filter And Krugman...<p>The IMF doesn&#39;t use a model to estimate the output gap. It uses a Hodrick-Prescott (HP) Filter:</p>
<p><a href="http://en.wikipedia.org/wiki/Hodrick%E2%80%93Prescott_filter" rel="nofollow">http://en.wikipedia.org/wiki/Hodrick%E2%80%93Prescott_filter</a></p>
<p>And Krugman was very clear as to why he used the IMF&#39;s HP-Filter estimates of the output gap:</p>
<p>&quot;In fact, however, I used estimates from the IMF, which gets its potential output numbers from a Hodrick-Prescott filter — basically, a trend estimate designed to smooth out short-term wiggles. I used the IMF numbers for two reasons: (a) laziness — the WEO database is very convenient for quick-and-dirty number crunching (b) avoiding circular reasoning. If potential output is estimated by assuming that inflation rises when output is above potential, finding that inflation rises when output is above potential … you get the picture.&quot;</p>
<p><a href="http://krugman.blogs.nytimes.com/2009/02/16/output-gaps-and-inflation-ultra-wonkish/" rel="nofollow">http://krugman.blogs.nytimes.com/2009/02/16/output-gaps-and-inflation-ultra-wonkish/</a></p>
<p>Now, Krugman has also addressed the flaws of using the HP-Filter in estimating output gaps:</p>
<p>&quot;Yet the methodology of using the HP filter basically assumes that such things don’t happen. Instead, any protracted slump gets interpreted as a decline in potential output! Here’s the chart I made way back in 1998 for the 1930s:</p>
<p>[Graph]</p>
<p>Yep: the HP filter “decided” that the US economy was back at potential by 1935. Why? Because it automatically interpreted the Great Depression as a sustained decline in potential, because by assumption the filter incorporated such slumps into its estimate of the economy’s potential. Strange to say, however, it turned out that there was in fact a huge amount of excess capacity in America, needing only an increase in demand to be put back into operation.<br />
<br />
It seems totally obvious to me that people who are now using HP filters to argue that we’re already at full employment are making exactly the same mistake. They have in effect, without realizing it, assumed their answer — using a statistical technique that only works if prolonged slumps below potential GDP can’t happen.&quot;</p>Larry commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017c34b6396c970b2012-12-17T20:00:01Z2012-12-17T20:00:01ZLarryI continue to support NGDPLT, which if done properly would eliminate the need for "expansionary" fiscal policy. I agree with...<p>I continue to support NGDPLT, which if done properly would eliminate the need for &quot;expansionary&quot; fiscal policy.</p>
<p>I agree with PK that having a large deficit in a time of high unemployment and low interest rates is not problematic per se, however doing so forever is problematic and the US has not put itself on a trajectory to reach a stable debt/GDP ratio.</p>
<p>It looks like today&#39;s low interest rates will continue for several years. But unless they continue forever, when they finally return to historically normal levels, interest payments will...triple? That would put a huge load on other federal spending. One more reason for NGDPLT!</p>Larry commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017ee6598dd3970d2012-12-17T19:43:55Z2012-12-17T19:43:55ZLarryJapan's new PM has spoken firmly about ending deflation there. He has the necessary votes. Interesting to see if he...<p>Japan&#39;s new PM has spoken firmly about ending deflation there. He has the necessary votes. Interesting to see if he goes for NGDPLT or a lesser measure.</p>anne commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017d3ee4e52a970c2012-12-17T19:16:19Z2012-12-17T19:16:19ZanneThe most absurd exchange rate policy I can imagine, and this is where Japanese deflation comes from: http://www.measuringworth.org/datasets/exchangeglobal/result.php?year_source=1960&year_result=2011&countryE%5B%5D=Japan Price of...<p>The most absurd exchange rate policy I can imagine, and this is where Japanese deflation comes from:</p>
<p><a href="http://www.measuringworth.org/datasets/exchangeglobal/result.php?year_source=1960&year_result=2011&countryE%5B%5D=Japan" rel="nofollow">http://www.measuringworth.org/datasets/exchangeglobal/result.php?year_source=1960&amp;year_result=2011&amp;countryE%5B%5D=Japan</a></p>
<p>Price of an American Dollar in Japanese Yen, 1980-2012</p>
<p>Japanese Yen</p>
<p>1980 ( 227)<br />
1981 ( 221) Reagan<br />
1982 ( 249) (High)<br />
1983 ( 238)<br />
1984 ( 237)</p>
<p>1985 ( 238) Plaza Accord<br />
1986 ( 168)<br />
1987 ( 145)<br />
1988 ( 128)<br />
1989 ( 138) Bush</p>
<p>1990 ( 145)<br />
1991 ( 135)<br />
1992 ( 127)<br />
1993 ( 111) Clinton<br />
1994 ( 102)</p>
<p>1995 ( 94)<br />
1996 ( 109)<br />
1997 ( 121)<br />
1998 ( 131)<br />
1999 ( 114)</p>
<p>2000 ( 108)<br />
2001 ( 122) Bush<br />
2002 ( 125)<br />
2003 ( 116)<br />
2004 ( 108)</p>
<p>2005 ( 110)<br />
2006 ( 116)<br />
2007 ( 118)<br />
2008 ( 103)<br />
2009 ( 94) Obama</p>
<p>2010 ( 88)<br />
2011 ( 80) (Low)</p>
<p>December 17</p>
<p>2012 ( 84)</p>anne commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017ee6596041970d2012-12-17T19:14:02Z2012-12-17T19:14:02ZanneI am completely serious in expressing disdain for the IMF's historical model as a jingoistic creation for the sake of...<p>I am completely serious in expressing disdain for the IMF&#39;s historical model as a jingoistic creation for the sake of the United States and selective western European * economies at the expense especially of developing nations.</p>
<p>* I suppose I should add Canada and Australia but they are as the United States or western Europe to me in essence.</p>
<p>As for deflation, Paul Krugman has not really properly understood just how sticky prices and wages downward are in the United States. We are not Japan and do not have a deflation generating Japanese Yen which has been allowed to and even pushed to absurdly appreciate since 1985 and the Plaza Accord.</p>anne commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017d3ee4d6ec970c2012-12-17T19:07:54Z2012-12-17T19:07:54ZanneThe IMF's model says Japan's output gap for 1998 was in fact less than two percent.... [ The IMF's model...<p>The IMF&#39;s model says Japan&#39;s output gap for 1998 was in fact less than two percent....</p>
<p>[ The IMF&#39;s model has been wildly destructive of those individuals or institutions who paid attention for years and years. The IMF&#39;s model is geared for international sacrifice for the sake of the United States and western Europe or at least the favored nations of western Europe. Thankfully the Chinese in particular understood. ]</p>Brian_Dell commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017ee6594b65970d2012-12-17T19:02:21Z2012-12-17T19:02:27ZBrian_Dellhttp://profile.typepad.com/briandellTHe IMF's model says Japan's output gap for 1998 was in fact less than two percent. On February 16, 2009...<p>THe IMF&#39;s model says Japan&#39;s output gap for 1998 was in fact less than two percent. On February 16, 2009 Krugman used this very same source to argue that the size of the output gap in the U.S. indicated a serious deflation danger.</p>Brian_Dell commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017d3ee4c128970c2012-12-17T18:55:21Z2012-12-17T18:55:27ZBrian_Dellhttp://profile.typepad.com/briandellThe record high for the proportion of firms with unfilled job openings was 34% and this was reached in 2000,...<p>The record high for the proportion of firms with unfilled job openings was 34% and this was reached in 2000, at the peak of the cycle and just before a downturn. This represented a climb up from a low of less than 15% at the time of the early 90s recession. </p>
<p>Increasing vacancies means there is an increasing shortage in the supply of labour relative to demand. An excess of aggregate demand is the opposite of an outgap gap since it is an inflationary gap. You could call it a positive output gap but regardless Krugman&#39;s contention is that there is a large negative gap (that there is shortage in the demand for labour, not the supply). The Keynesian contention, remember, is that there is a cyclical deficiency of aggregate demand. Increasingly, the Keynesians are being proved wrong because we are seeing potential GDP marked down by most observers (this closes the gap and should reduce estimations of the size of the negative output gap).</p>Fred C. Dobbs commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017ee659388c970d2012-12-17T18:51:31Z2012-12-17T18:51:31ZFred C. Dobbs'Well, aren't we all. Except PK & the Keynesians.' Confused, that is.<p>&#39;Well, aren&#39;t we all. <br />
Except PK &amp; the Keynesians.&#39;</p>
<p>Confused, that is.</p>Bill Jefferys commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017ee6588300970d2012-12-17T17:07:31Z2012-12-17T17:07:31ZBill Jefferys...as well as Medicare Part D, which was not paid for and which cannot negotiate with drug suppliers.<p>...as well as Medicare Part D, which was not paid for and which cannot negotiate with drug suppliers.</p>Fred C. Dobbs commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017d3ee3b526970c2012-12-17T16:17:38Z2012-12-17T16:17:38ZFred C. DobbsAll the recent references to "frickin' sharks with frickin' laser beams attached to their frickin' heads" prompted me to review...<p>All the recent references to &quot;frickin&#39; sharks with <br />
frickin&#39; laser beams attached to their frickin&#39; heads&quot;<br />
prompted me to review the whole Austin Powers/Dr Evil<br />
oeuvre.</p>
<p>The &quot;frickin&#39; sharks&quot; don&#39;t actually have much to do <br />
with anything important.</p>
<p>&#39;Dr. Evil seems to have a problem in general with <br />
understanding money, especially regarding the <br />
modern American economy and inflation.&#39;</p>
<p>Well, aren&#39;t we all. Except PK &amp; the Keynesians.</p>
<p>Wikipedia: The general theme of the films is that the arch-villain Dr. Evil plots to extort large sums of money from governments or international bodies but is constantly thwarted by Powers, and (to a degree) his own inexperience with life and culture in the 1990s. In the first film, Austin and Dr. Evil are awakened after being cryogenically frozen for 30 years. Continuing to incorporate cultural elements of the 1960s and 1970s, the second and third films feature time travel as a plot device and deliberately overlook inconsistencies. ...</p>
<p>Dr. Evil seems to have a problem in general with understanding money, especially regarding the modern American economy and inflation. In the first film, he intends to hold the world ransom for one million dollars, but doesn&#39;t understand that isn&#39;t as large a sum of money as it was in the 1960s, because of inflation, and the demand causes the U.N. to burst out laughing. In the second film, Dr. Evil goes back to 1969 and plans to hold the world ransom for $100 billion, and when he tells the amount to the President, he receives a similar reaction as in the first film when the President and his cabinet laugh at him. In the second film, Dr. Evil says, &quot;Why make trillions when we can make ... BILLIONS?&quot; not knowing that trillions are larger than billions. In the third movie, he demands &quot;1 billion, gagillion, fafillion, shabolubalu million illion yillion ... yen.&quot; This time his demand is met with simple confusion from the world leaders. ...</p>
<p>One of Dr. Evil&#39;s greatest desires is to have &quot;frickin&#39; sharks with frickin&#39; laser beams attached to their frickin&#39; heads,&quot; and is disappointed when he can&#39;t have the sharks because of laws on endangered species. ...</p>
<p></p>
<p><br />
</p>Lilguy commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017c34b47cf7970b2012-12-17T15:29:52Z2012-12-17T15:29:52ZLilguy". . . in a growing economy, budgets don’t have to be balanced to be sustainable . . ." That...<p>&quot;. . . in a growing economy, budgets don’t have to be balanced to be sustainable . . .&quot;</p>
<p>That sounds likely something straight out of the Bush/Cheney tax play book!</p>
<p>Come on now: At some point we have to reduce the deficit and there is no time better than the good times.</p>
<p>We shouldn&#39;t be trying to do it now in a slow growth or recessionary period (Krugman&#39;s overwhelming msg). We need to do it when &quot;times are good.&quot;</p>DrDick commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017ee657daed970d2012-12-17T15:15:23Z2012-12-17T15:15:23ZDrDickWe are also paying far too much to executive compensation and too little to productive labor.<p>We are also paying far too much to executive compensation and too little to productive labor.</p>DrDick commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017ee657d3bd970d2012-12-17T15:10:13Z2012-12-17T15:10:13ZDrDickI would generally agree with this. The primary sources of the current deficit are the costs of two unnecessary wars...<p>I would generally agree with this. The primary sources of the current deficit are the costs of two unnecessary wars of aggression and reckless and unneeded upper class tax cuts, along with foolish deregulation of industry, especially the financial industry. If you want to reduce the deficit, attack the causes.</p>anne commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017c34b4454b970b2012-12-17T14:55:18Z2012-12-17T14:55:18ZanneCorrecting: As for job creation, there have been [1.37] million jobs created in the last 143 months or in the...<p>Correcting:</p>
<p>As for job creation, there have been [1.37] million jobs created in the last 143 months or in the last 11 years and 11 months, and if that does not mean there is an output gap, well, I do not have any idea what does....</p>
<p><a href="http://www.bls.gov/webapps/legacy/cesbtab1.htm" rel="nofollow">http://www.bls.gov/webapps/legacy/cesbtab1.htm</a></p>
<p>December 7, 2012</p>
<p>Employment Loss &amp; Growth Summary</p>
<p>December 2007 - November 2012</p>
<p>Total Nonfarm Private Employment Loss = (- 3,716,000)<br />
Total Nonfarm Government Employment Loss = (- 414,000)</p>
<p>Total Employment Loss = (- 4,130,000)</p>
<p>Where the severe Reagan recession of 1981-1982 had given way to complete employment recovery in 28 months from the beginning of the recession, we are 59 months from the beginning of the recession in December 2007 and there are 4.13 million fewer jobs now than there were at that time.</p>anne commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017c34b44082970b2012-12-17T14:52:38Z2012-12-17T14:52:38ZanneAs for job creation, there have been 1.43 million jobs created in the last 143 months or in the last...<p>As for job creation, there have been 1.43 million jobs created in the last 143 months or in the last 11 years and 11 months, and if that does not mean there is an output gap, well, I do not have any idea what does:</p>
<p><a href="http://www.bls.gov/webapps/legacy/cpsatab1.htm" rel="nofollow">http://www.bls.gov/webapps/legacy/cpsatab1.htm</a></p>
<p>December 7, 2012</p>
<p>The Bush-Obama experience in monthly job created has been,</p>
<p>9,590 x 143 months = 1.37 million jobs created in all;</p>
<p>enough job creation to keep up with civilian work force growth would have meant,</p>
<p>138,350 x 143 = 19.78 million jobs created in 143 months;</p>
<p>the Clinton experience was,</p>
<p>240,260 x 96 = 23.07 million jobs created in 96 months.</p>anne commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017ee657a628970d2012-12-17T14:48:40Z2012-12-17T14:48:40ZanneIn 1998 Paul said "my guess is that in retrospect it will seem clear that Japan's 1998 output gap was...<p>In 1998 Paul said &quot;my guess is that in retrospect it will seem clear that Japan&#39;s 1998 output gap was 8 percent or more.&quot; I dare say that in retrospect Japan was operating far closer to potential than that. He&#39;s likely overestimating the gap again, given where inflation is currently at....</p>
<p>[ Dare say whatever you care to dare say, but since you offer no coherent argument I dare say you are wrong. As for inflation, there is no meaningful as far as I or any bond investor can tell. ]</p>anne commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017d3ee326c5970c2012-12-17T14:44:40Z2012-12-17T14:44:40ZannePrecise references are necessary: http://web.mit.edu/krugman/www/bpea_jp.pdf 1998 It's Baaack! Japan's Slump and the Return of the Liquidity Trap By Paul Krugman...<p>Precise references are necessary:</p>
<p><a href="http://web.mit.edu/krugman/www/bpea_jp.pdf" rel="nofollow">http://web.mit.edu/krugman/www/bpea_jp.pdf</a></p>
<p>1998</p>
<p>It&#39;s Baaack! Japan&#39;s Slump and the Return of the Liquidity Trap<br />
By Paul Krugman</p>
<p>If the 1997 output gap was 3-4 percent; if potential output growth in Japan is 2-3 percent; and if, as now seems certain, output falls throughout 1998, then the output gap at end year will be quite probably exceed 7 percent. Obviously there is no precision in this estimate; my personal guess is that in retrospect it will seem clear that Japan’s 1998 output gap was 8 percent or more. But we can make a very strong case that it will exceed 5, making demand-side policies to close that gap of very real importance....</p>EMichael commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017d3ee276df970c2012-12-17T12:55:45Z2012-12-17T12:55:45ZEMichael"Then it would be equally obvious that companies would not do something that would lead to lower profits or bankrupt...<p>&quot;Then it would be equally obvious that companies would not do something that would lead to lower profits or bankrupt them. But companies, like AIG &amp; big banks, did such things.&quot;</p>
<p>Google Dick Fuld and income or Mozilo and income or Daniel Mudd and income.</p>Fred C. Dobbs commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017ee656e9d6970d2012-12-17T12:41:55Z2012-12-17T12:41:55ZFred C. DobbsIn 'The Martian Chronicles', there was 'a certain summer when everybody climbed into rockets and went to Mars.' What we...<p>In &#39;The Martian Chronicles&#39;, there was &#39;a certain<br />
summer when everybody climbed into rockets and<br />
went to Mars.&#39; What we had was a decade when<br />
everybody&#39;s jobs hopped onto the Internet<br />
and went to China. See the difference?</p>Fred C. Dobbs commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017d3ee24b69970c2012-12-17T12:27:53Z2012-12-17T12:27:53ZFred C. DobbsJust ask 'Dr Math': American vs. European Billion http://mathforum.org/library/drmath/view/52579.html<p>Just ask &#39;Dr Math&#39;: American vs. European Billion </p>
<p><a href="http://mathforum.org/library/drmath/view/52579.html" rel="nofollow">http://mathforum.org/library/drmath/view/52579.html</a></p>bakho commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017d3ee24adb970c2012-12-17T12:27:24Z2012-12-17T12:27:24ZbakhoMore simply. Unemployment and the GDP gap are our #1 problem. Fix that problem and the deficit takes care of...<p>More simply. Unemployment and the GDP gap are our #1 problem.</p>
<p>Fix that problem and the deficit takes care of itself in the short term.</p>
<p>In the long run, health care costs are our #1 problem.</p>
<p>Bring health care costs in line with every other country on the planet and the long term deficit takes care of itself.</p>
<p>We also have a misallocation problem. We are paying way too much to the finance industry and not enough to other sectors. This is part of the cost of rising inequality. The rich have all the money and the only way anyone else can spend is to borrow from the rich. Of course, BigG could tax the rich and spend the money which would be a good solution.</p>Daniel Kruppa commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017ee656cfbe970d2012-12-17T12:25:59Z2012-12-18T10:50:06ZDaniel Kruppahttp://profile.typepad.com/kruppaIts the other way around. Once people use the new money supply more work will be demanded to underpin all...<p>Its the other way around. Once people use the new money supply more work will be demanded to underpin all the spending.</p>bakho commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017ee656c9cd970d2012-12-17T12:21:55Z2012-12-17T12:21:55ZbakhoOr just give cash to people who will spend it. We can even make them do work for it.<p>Or just give cash to people who will spend it.<br />
We can even make them do work for it.</p>Fred C. Dobbs commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017c34b3395c970b2012-12-17T12:16:17Z2012-12-17T12:16:17ZFred C. DobbsIt seems to me that 'million', 'billion' & 'trillion' all sound too much alike, so we imagine they must be...<p>It seems to me that &#39;million&#39;, &#39;billion&#39;<br />
&amp; &#39;trillion&#39; all sound too much alike,<br />
so we imagine they must be pretty close<br />
in value. (&quot;Isn&#39;t a trillion, like, maybe<br />
*three* million, &#39;cause a billion is like,<br />
*two* million, right?&quot;) It helps to consider <br />
that a million is a pretty large number, and <br />
a trillion, which henceforth perhaps should <br />
be written TRILLION, is a million*million.</p>
<p>Even if a *billion* is only a thousand*million,<br />
it&#39;s still a pretty large number.</p>
<p>(It doesn&#39;t help that over in Europe, where<br />
they&#39;re all socialists anyway, a &#39;billion&#39;<br />
is a million*million, so a &#39;trillion&#39; must<br />
be, like, a million*million*million, right?)</p>beezer commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017ee6568398970d2012-12-17T11:38:08Z2012-12-17T11:38:08Zbeezerhttp://www.beezernotes.com/wordpress/I agree with your version of why private actors aren't hiring. Could be true. There's a third reason, too. That's...<p>I agree with your version of why private actors aren&#39;t hiring. Could be true. There&#39;s a third reason, too. That&#39;s the one where private companies are bankrupt but have positive cash flow: The &#39;zombie&#39; explanation that&#39;s applied to Japan.</p>
<p>Whatever the reasons for not hiring, not hiring is the crucial problem. I was just saving time in order to repeat the obvious (to me anyway.) Hire away, Big G!</p>winstongator commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017c34b2f8b7970b2012-12-17T11:36:13Z2012-12-17T11:36:13ZwinstongatorNO. Keynes's basic point is that governments should be counter-cyclical forces, when in effect they end up magnifying the business...<p>NO. Keynes&#39;s basic point is that governments should be counter-cyclical forces, when in effect they end up magnifying the business cycle. Keynes would advocate for surpluses in good times. These do two things: improve national finances for when deficit spending is needed, and temper the business cycle (if the fiscal cliff will slow a weak economy, it would have also slowed a booming economy).</p>
<p>Deficits were considered an ok form of stimulus when Bush was president. <br />
&#39;Job creators&#39; did a much better job during the tax regime of Clinton than of Bush II.</p>beezer commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017ee65679ec970d2012-12-17T11:31:53Z2012-12-17T11:31:53Zbeezerhttp://www.beezernotes.com/wordpress/Whatever policy that increases employment is the policy that is to be used. That's the main metric: Employment. The Fed...<p>Whatever policy that increases employment is the policy that is to be used. That&#39;s the main metric: Employment.</p>
<p>The Fed has produced zero interest rates and in various programs purchased assets from the private sector. While these actions have helped, unemployment stubbornly remains too high.</p>
<p>Final answer? Government spending on infrastructure in whatever amounts it takes to drive employment by the millions. I think a $5 trillion, five year program, would do the trick. And I don&#39;t give a cow&#39;s ass if it creates larger deficits in the meantime.</p>winstongator commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017d3ee1f0c5970c2012-12-17T11:30:12Z2012-12-17T11:30:12ZwinstongatorYou have a logical error: You are assuming that companies would obviously hire if that led to higher profits. Then...<p>You have a logical error: You are assuming that companies would obviously hire if that led to higher profits. Then it would be equally obvious that companies would not do something that would lead to lower profits or bankrupt them. But companies, like AIG &amp; big banks, did such things. </p>
<p>How to reconcile? Short vs. long-term thinking. Hiring always hurts short-term profits. It takes a while for hires to be trained, up-front costs, etc. Companies fear those short term costs, even companies with large cash hordes. The same mentality led banks to chase short term profits while building up immense long-term risks.</p>
<p>I agree with your point on massive infrastructure spending, unless you&#39;re advocating for the people building the moat for the wealthy.</p>Second Best commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017c34b2d803970b2012-12-17T11:14:56Z2012-12-17T11:14:56ZSecond BestOn the other hand, if someone rants in deficit scold fashion that climate change has resulted in a 23% CHANGE...<p>On the other hand, if someone rants in deficit scold fashion that climate change has resulted in a 23% CHANGE in parts per million of CO2 concentration of 72 PARTS PER MILLION IN ONLY 52 YEARS (from just under 320 in 1960 to 392 in 2012), the Dr Evils, many of whom don&#39;t know the difference between deficit and debt, would go apoplectic with &#39;scientific proof&#39; that it was a lie.</p>
<p>Marginal Revolution indeed.</p>beezer commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017c34b2d18a970b2012-12-17T11:10:56Z2012-12-17T11:10:56Zbeezerhttp://www.beezernotes.com/wordpress/Brian: If the jobs are vacant, then that defines and output gap, no? More vacancies, bigger gap, right? We have...<p>Brian: If the jobs are vacant, then that defines and output gap, no? More vacancies, bigger gap, right? We have an employment problem, that&#39;s certain. So what is a practical response to poor employment levels? I don&#39;t want to get too complicated here, but I&#39;m pretty sure hiring people would help, correct?</p>
<p>If private companies cannot hire profitably, which is obviously the case because if hiring increased their profits they would hire, then the government can hire. It doesn&#39;t need to make a profit, at least a profit as defined by a private company.</p>
<p>So what could we build that would result in more jobs and, at the same time, result in a more competitive nation? Readers here don&#39;t need for me to list what we could build, because they already know that the list is long, beneficial to the nation and employment, and in the trillions of dollars.</p>
<p>We have a Republican problem here. It&#39;s completely political and it has nothing to do with deficits or debt, two items which Republicans have historically ignored. It&#39;s all about power. It&#39;s entirely about the uber rich constructing a socialist moat around their wealth. </p>
<p>Tax them to help pay for the work that needs to be done. It will be the best investment they could make to improve the nation&#39;s future.</p>John Cummings commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017c34b2c376970b2012-12-17T11:02:39Z2012-12-17T11:02:39ZJohn CummingsFrom the way I understand Keynesian philosophy, you get the deficit to a target rate that isn't ended to the...<p>From the way I understand Keynesian philosophy, you get the deficit to a target rate that isn&#39;t ended to the economy is at full employment.....</p>
<p>Like set it to 1.5 trillion and if the economy improves, falls below that number, increase spending to that number is hit to full employment. This will change expectations and confidence will soar meaning lower deficits if not outright surplus in the near future. Thus spending will then be slashed and taxes raised to curb inflation meaning needed budget surpluses. </p>
<p>Keynesians also believe lower taxes should be directed toward the middle income groups because they spend the most in bulk and that taxes should be higher on the wealthy to control asset inflation which hurts the middle income groups. </p>
<p>So raise spending, tax the rich, tax cut for middle income will create a new economic boom because the spending will help confidence/innovation and spur income growth for the middle incomes classes. This will in the end, spur profits for the capital classes and they will more than make up what they lost in taxes with a happy, cheerful middle income group.............. </p>
<p>ok<br />
</p>Brian_Dell commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017d3ee1a31c970c2012-12-17T10:40:59Z2012-12-17T10:41:05ZBrian_Dellhttp://profile.typepad.com/briandellIn 1998 Paul said "my guess is that in retrospect it will seem clear that Japan's 1998 output gap was...<p>In 1998 Paul said &quot;my guess is that in retrospect it will seem clear that Japan&#39;s 1998 output gap was 8 percent or more.&quot; I dare say that in retrospect Japan was operating far closer to potential than that. He&#39;s likely overestimating the gap again, given where inflation is currently at. I might also note that job vacancies rose throughout 2010, 2011, and the first half of 2012 which isn&#39;t consistent with an enormous output gap.</p>Daniel Kruppa commented on 'Paul Krugman: That Terrible Trillion'tag:typepad.com,2003:6a00d83451b33869e2017d3ee12ae6970c2012-12-17T09:21:08Z2012-12-18T10:50:06ZDaniel Kruppahttp://profile.typepad.com/kruppaThe deficit might not even exist if the economy was more vibrant. The problem is that the current methods of...<p>The deficit might not even exist if the economy was more vibrant. The problem is that the current methods of stimulus such as monetary policy expand the debt load and monetary policy is very dependant on the lending policies of banks which may not lend adequately or lend too much into speculative areas and create bubbles. A solution would be to remove commercial banks from setting monetary policy and modifying the central bank so it deals directly with the public: internationalmonetary.worpress.com</p>